Good day and thank you for standing by. Welcome to the Bank of Hawaii Corporation Third Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Chang Park, Senior Vice President, Investor Relations Director. Please go ahead.

Good morning and good afternoon. Thank you for joining us today for our third quarter 2024 earnings conference call. Joining me today is our Chairman and CEO, Peter Ho; President and Chief Banking Officer, Jim Polk; CFO, Dean Shigemura; Chief Risk Officer, Brad Shairson; and our Deputy CFO, Brad Satenberg. Before we get started, let me remind you that today's conference call will contain some forward-looking statements. And while we believe our assumptions are reasonable, there are a variety of reasons that the actual results may differ materially from those projected. During the call this morning, we'll be referencing our slide presentation as well as the earnings release. Both of these are available on our website boh.com, under the Investor Relations link. And now, I'd like to turn the call over to Peter.

Thanks, Chang, and good morning or good afternoon, everyone. Bank of Hawaii is pleased to report another solid performance in the third quarter of 2024. Net income and diluted earnings per share increased notably on a linked basis. Net interest income and NIM expanded for the second straight quarter. Fee income grew and operating expenses fell on a linked basis. Loans and deposits grew in the quarter, capital levels improved and credit quality remains pristine. As is our custom, I will spend a little time highlighting market conditions in the islands, I'll then ask Brad to provide a few comments on credit quality and Dean will provide further detail on our financials. The balance sheet performed well in the quarter with higher spot loan and deposit balances and stable average balances. Capital levels improved across all measures on top of the meaningful step-up in Q2. Deposits continue to perform well, up 2.8% on a linked spot basis and up modestly on an average linked basis. We are pleased to again hold the top deposit market share position in Hawaii for 2024 as measured by the FDIC Annual Summary of Deposits. Both cost of interest bearing and cost of total deposits continued to track well, well below peer medians. Unemployment in Hawaii continues to track at 2.9%, well below the national average. Visitor arrivals continue to be impacted by lower Maui arrivals, but remain elevated from pre-pandemic levels. Same can be said for RevPAR. Oahu residential real-estate continues to trend stable with median sales prices up modestly for both single family and condominiums on a year-to-date basis. Median days on market remain below 30 days. Now, let me turn the call over to Brad to discuss a few trends on credit. Brad?

Thanks, Peter. As always, I'll start off with our lending philosophy. We focus on our core markets in Hawaii and the Western Pacific. This allows us to leverage our local expertise to make sound credit decisions. Additionally, we know our clients well. The majority of our loan book is the long standing relationships where about 60% of our clients on both the commercial and consumer side have been with us for over 10 years. This combination has greatly contributed to our historically strong credit performance and has resulted in a loan portfolio that is 93% Hawaii, 4% Western Pacific and just 3% Mainland where we support our clients that are doing business in both Hawaii and on the Mainland. As I walk through our current state, you'll notice there is little change quarter-over-quarter. The lending philosophy I just mentioned is reflected in our loan growth, which has been steady and organic. From 2019 through 2023, we averaged about 6.7% loan growth per annum. This year, however, loan growth has slowed due to suppressed demand from the high rate environment. On the consumer side, which represents 57% of our total loans or $8 billion, we are predominantly lending on a secured basis against real-estate. 85% of our portfolio is comprised of residential mortgage or home equity with a weighted average LTV of just 48% and a combined weighted average FICO score of $800. The remaining 15% of the portfolio is a combination of auto and personal loans where our average FICO scores are 733 and 759, respectively. Moving on to commercial. Our portfolio size is $5.9 billion or 43% of our total loan book. The largest share of commercial is commercial real-estate with $3.9 billion in assets, which equates to 28% of total loans. This book is well diversified across industries…

Thank you, Brad. In the third quarter, our net interest income increased by $2.8 million and the net interest margin increased by 3 basis points. Continuing the trend from the second quarter. Linked quarter, the $2.8 million increase in net interest income was driven by cash flow repricing, an increase in earning assets and balance sheet actions. Including the reinvestment of securities portfolio runoff and repositioning our swap portfolio. Partially offset by deposit mix shift. With regard to cash flow repricing, in the third quarter, our earning assets generated $513 million of cash flows from maturities and prepayments. Assuming that all of these cash flows from loans were reinvested into like products and cash flows from securities reinvested into cash, such reinvestment would have generated incremental net interest income of approximately $3.6 million in the quarter from higher reinvestment yields. At the same time, deposit mix-shift has continued to slow. With average non-interest bearing and low-yield interest bearing deposit balances declining by $315 million linked quarter. This compares to a decline of $800 million in the same period of 2023. Assuming the majority of these balances shifted into higher-yielding interest bearing deposits, such mix-shift negatively impacted net-interest income by $2.6 million in the third quarter. We expect our net interest income to continue to improve from the gradual decrease in the Fed funds rate the initial 50 basis points of Fed easing is expected to ultimately add $1.2 million to our quarterly net interest income. In particular, total earning assets that were immediately impacted by changes in the Fed funds rate was approximately $7.6 billion at quarter end. Consisting of floating rate loans and investment securities, interest rate swaps and Fed funds. The 50 basis point decrease in Fed funds will reduce quarterly income from these rate sensitive earning assets…

Thanks, Dean. This concludes our prepared remarks. Now we'd be happy to entertain your questions.

[Operator Instructions] Our first question comes from the line of Jeff Rulis with D. A. Davidson. Your line is now open.

Thanks. Good morning.

Good morning, Jeff.

Dean, maybe a couple of questions on the margin. One, were there any interest recoveries or one-timers in the margin this quarter? And then do you have the September average?

The -- in the quarter, there was maybe a small amount of actually reversals, but it was like about $100,000, so nothing material. In terms of the margin in September, it was, I believe 2.17%.

Okay. Got it. And just sort of summarizing, I appreciate that. I got a lot of detail on the puts and takes of the rate cut impact. Sounded like a near term headwind, a positive thereafter, your core is climbing higher. Just the expectations of -- can you negate that negative in the short run or is it a flattish outlook on the margin in the next couple quarters?

Yes, we believe that the NII and margin will gently increase quarter-over-quarter. And as we laid out in our presentation, we're going to continue to see the asset repricing from the cash flows offset partially by some continued remix on the deposit side. And we're continuing to actively manage our balance sheet, which includes buying or reinvesting some of our cash flows into securities as well as adjusting the interest rate swaps according to how rates trend. And then, with regard to the Fed funds rate cut, over the longer-term, we do think it will be accretive as laid out in the presentation as well. Initially, it will have a slight negative. But when you mix all that together, that's how we get to a generally rising NII and margin.

Great. Thanks, Dean. And maybe one last one. Brad, you talked -- I appreciate the philosophy and a very low comparative NPAs. I just want to continue to track the increase in non-accruals. Is there a sector that, that came from or was it pretty granular and widespread?

No, so there wasn't really a sector that it came from, in particular, I would say actually that the NPAs, the rise while not from a given sector, I would say that the little bit of an increase was caused from some non-core lending activities that were done historically quite a while back. But absolutely there's nothing systemic or broad based in the portfolio. As I may have said before, if I were really pressed on where there would be any weakness in the portfolio at all, it would be just a small subsegment of a sector and that would be the lodging area. So if we think about our lodging, what lodging is actually more dependent upon international visitors to Hawaii and that's where if anything we'd see a little bit of weakness in that area. But we have really strong sponsors that support those properties and we feel really good about how we're positioned as well as the fact that the LTV of that portfolio is about 60%. So really just not seeing anything in the portfolio of any real concern. And as you know, I think I had mentioned last quarter that we're always working with our borrowers and we do expect to see some resolutions through either refinancing, payoffs or upgrades. And as mentioned, this payoff came in a little bit subsequent to quarter end. So that did bring our criticized back down to 2.19%. But yeah, so -- nothing systemic in the portfolio. I would say that, the rationale or the reason that the criticized went up to 2.42% to start with was due to a single credit in the multi-family space. That credit a little bit of deterioration in their operating results. But what I would say about that is that also has strong sponsorship and our criticized for multifamily is 5.8% overall. So feel really good about that portfolio too.

Okay. Thanks, Brad. Pretty consistent with the prior quarter. I appreciate it. I'll step-back.

Thank you. Our next question comes from the line of Jared Shaw with Barclays. Your line is now open.

Hi, good morning, good afternoon. Maybe just looking at the delta between end of period deposits and average, if you could just go back to maybe reminding us if there's any additional seasonality this quarter or should we be expecting that to be trending towards average here?

Yeah, hi, this is Jim. I'll take that one. As we got to the end of the quarter, we saw some, what I’d characterize as unexpected large public deposits and maybe some seasonal build on both the commercial and the public side. We also had some really nice business that we won on the commercial that helped boost balances. As we get into the fourth quarter though, I think we'll see some moderation in that probably a bit back towards the average that we saw in Q3 as some of the temporary deposits run off and actually some of the new business migrates from the commercial side of the business to the asset management side of the house.

Okay. And then in terms of the -- looking at DDAs, is this sort of a good level you think to start building from on those sort of core DDAs? Have we seen the end of diminishment and maybe an update of how early looking the fourth quarter balances are on there?

Yeah. Jared, this is Peter. I'm not sure, we're ready to declare the end of that trend. The negative comp though is definitely shrunk as I think Dean pointed out to $315 million. What we actually measure is non-interest bearing as well as what we would classify as low yield savings or other types of deposits. So that level has come down dramatically from five quarters ago, continue to do so. I think we may have another couple of quarters though of like negative comps in front of us, my guess.

Okay. Thanks. And then just finally, I guess going back to the question Jeff just asked on lodging. What's the total dollar exposure to that subset of lodging that maybe is more tied to the international visitor?

Well, that's a good question. I wouldn't -- I can't really tie a sub-segment to those dependent on it. There are certain hotels, obviously that would be more catering to international visitors, but all hotels, of course have some sort of mix to that segment. So it's really hard to mention -- to really isolate. But what I would say, it's a fraction of the $700 million that we have in lodging that would really relate to the -- to international -- to hotels focused on international visitors.

Yeah. And by the way, the international segment is actually the best performing segment this year. So Japan visitor arrivals are up significantly, 38% plus spending up 28%. Obviously, that's coming-off of pretty low basis, but the -- I think the improving foreign exchange relationship between the dollar and yen is having a positive impact there.

And we still don't see a huge amount of criticized credits in that arena. It's about 15% of our lodging overall is criticized and we have 62% weighted average LTP on those.

Great. Thank you.

Thank you. Our next question comes from the line of Andrew Liesch with Piper Sandler. Your line is now open.

Thanks. Good morning, everyone. Just a question on the loan growth here. Just curious if there's anything specific you can point to that drove the commercial real-estate gains this quarter?

This is Jim. I'll take it. No, it was really a nice mix. So we've seen our pipelines build -- both pipelines and production build nicely through Q3, and it was a nice mix of commercial mortgage, a little bit of construction on it. But overall, I think pipelines are just feeling better at this point in time.

Yeah. I'd say -- I’d just chime in, Andrew, that I think our experience is usually that commercial lending activity leads out of a market or into an up cycle. We're starting to see that commercial activity on a spot basis was up 2% in the quarter. Consumer lagging a bit there. And so, we would continue to anticipate build in the commercial segment. And I think at some point consumer is going to begin to tail up which will give us hopefully a better overall loan growth aggregate number.

Got it. Do you think any changes in rates, people have come off the sidelines? Have you heard of projects being delayed in anticipation of that?

The commercial side seems to be, I won't say off to the races, but people are pretty constructive. And on the consumer side, I think people are waiting for rates to finally come down and frankly have been head-faked a couple of times for the past year. So we're still waiting to see that wave build.

Got it. Great. All my other questions have been asked and answered. I'll step back. Thank you.

Yeah, take care.

[Operator Instructions] Our next question comes from the line of Kelly Motta with KBW. Your line is now open.

Hi, thanks for the question. I would like to circle back to expenses. I appreciate, I think you said 1.5% to 2% growth. You had a couple of separation expenses and FDIC charges in there. I'm trying to -- is there any way you could clarify what you're looking for 4Q? Is it about $109 million? Just with all the one-timers, I'm just trying to understand what exactly that implies here?

Yeah, I guided actually to 1% to 1.5% for the full year. So it's actually slightly lower than what I had mentioned last quarter. But yeah, if you do the math, it does imply a higher end of about $109 million in the fourth quarter, which is very high. So there's likely to be on the lower end of that range of guidance. But there isn't anything in the third quarter. There are some pluses and minus one-time items, but they all kind of netted out. So guidance for the full year of 1% to 1.5% is good -- is a good number.

And -- okay. So 1% to 1.5% relative to about....

The $419 million, yeah.

Okay. Got it.

So, $109 million in the quarter.

$109 million is more going to be on the -- like closer to the $107 million or less in the quarter.

Okay. So similar to what we saw in Q3, is that another way?

Yeah.

Okay. Awesome. That's helpful. And on the fee side, I appreciate you had given guidance. It was elevated in Q3. I was wondering how much of that is related to the volatility with the Japanese currency and what a good run-rate for that is?

Yeah, Kelly, it's Peter. There's about $1 million in what I would call kind of one time-ish extraneous opportunity. But the balance of that feels recurring. The foreign exchange revenue really isn't significantly playing into the deltas here at all. I think longer term, that's a good opportunity for us, but it's not really having an impact. It's really we're seeing just kind of across the board better fee performance. The commercial bank did have a good fee quarter for the third-quarter and that's kind of playing into the $1 million extraordinary piece. But on-balance, we would expect fee income to be somewhat elevated from historic levels moving forward.

Got it. That's helpful. And then I really appreciate all the color on the margin in the moving parts. Just a point of clarification on Slide 29. I just want to make sure I'm understanding this correctly. That short-term NII impact of $2.5 million, that's just from a immediate repricing of rate sensitive assets and deposits, it doesn't include any of that impact of cash flows being reinvested at higher rates, which gets you to that general NII lift. Is that the right way to think about it?

That's correct. That page specifically is speaking to the impact of Fed funds alone to the variable assets and then longer-term to the variable liabilities deposits.

Awesome. Maybe just a couple more for me. The borrowings. You have other debt of $560 million. I think that's FHLB. Can you remind me what the term is on that and how you're thinking of that? Is that going to -- any thoughts on paying that down or is that going to kind of remain here and support the size of the balance sheet at least near term?

Yeah, that it's about two to three years to maturity roughly. And then the rate on those -- that funding is 4.13% so it's still relatively for us good source of stable funding at a fixed rate. And as the rates change, we are going to also be looking at that and making adjustments to that if optimal.

Yeah. So that funding will be rate dependently, Kelly.

Okay, thanks. Very last one, if I could just slip it in. You may have covered this in your prepared remarks about the swaps and I may have missed it, but on the $300 million of forward-starting swaps, when does that roll-on and what is the peak notional active?

The -- they start in '25 and '26, so mid '25 to early '26. And the rate on that is 3.03%. But between now and then, we are still going to manage the position and that's how we're looking at managing our rate sensitivity to -- on the short end as well. So it will vary between now and then from the $2.8 billion.

And it's also -- this is Brad, it's also important to note that the forward swaps are set to coincide with the maturity of $300 million of notional AFS swaps as well. So it really won't impact the total exposure there.

Yeah, that's a good point.

Yeah. I mean, just a broader picture, we're sitting at 53% fixed float as of the third-quarter. Assuming that kind of the concept of continuing lower rates holds, we would anticipate taking that fixed flow position more towards the 58%, 59% range. Take advantage of the slope of the yield curve.

That's super helpful. I'll step back. Thank you for all the questions here.

Thank you, Kelly.

Thank you. And I'm currently showing no further questions at this time. I'd like to turn the call back over to Chang Park for closing remarks.

Thank you everyone today for your -- and your continued interest in Bank of Hawaii. Please feel free to reach out to me if you have any additional questions. Thanks again, and have a good day.

This concludes today's conference call. Thank you for your participation. You may now disconnect.